How to Calculate Cost of Equity using CAPM

This video shows how to calculate a company's cost of equity by using the Capital Asset Pricing Model (CAPM).

You can calculate the cost of equity for a company by using the following formula:

Cost of Equity = Risk-free Rate + Beta * (Expected Market Return - Risk-free Rate)

For example, let's say the risk-free rate is 2% and the expected market return is 10%. If a company's beta is 2.5, its cost of equity would be 22%. This cost of equity is the required rate of return that investors would expect to receive based on the company's systematic risk. If the systematic risk were higher (for example, a company with a beta of 3.0), then the cost of equity would be higher (26%) because investors would expect a higher return to compensate for bearing a higher level of systematic risk.—
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